Small, independent cable operators seeking the much-needed capital to fund new technologies and equipment to compete against multi-service providers such as satellite, utilities and others, are finding the road to financing anything but smooth.

In fact, few roads remain open for smaller cable operators seeking the capital to not only grow their businesses, but also just to survive. And even those roads are fraught with detours and closures.

Nevertheless, the small cable operator community, which is no stranger to the arduous road to capital access, fully understands the critical need for new technologies, creative operational strategies, savvy business decisions, and that time is of the essence. Challenges "There’s not a lot of financing for smaller operators, especially in today’s market. You’ve got to rebuild plant and acquire new technology like set-top boxes, which are expensive. And technology is moving so quickly, you’re behind the curve before you’ve acclimated to it," said Jess King, president of Cablevision of Marion County, FL, a small, 7,000 subscriber system with five headends that is tying in a fiber loop from a single headend.

Cablevision is the classic small cable operator facing the dilemma of adding crucial new technology while searching for the elusive capital to acquire it. And it’s a monumental challenge.

"Ultimately, digital cable with deep fiber in the long-term is a good business prospect, even for smaller independent operators. Advertising, Internet, phone service and other services are available with new technologies," King said.

"And there’s lots of potential. But it’s very difficult to move forward now, with lenders looking at multiple coverages of cash flow to debt ratios. And the money available is going down. Two-way is a must, and then you have to control the signal to noise. Those who survive will be really strong if they can get the technology upgraded to offer the right services," he added. Heresy And making the right business decisions helps, too, which King noted may require abandoning the video business altogether. "You have to open up another revenue stream, and video is a loss leader and a commodity that’s being squeezed out and isn’t profitable."

As heretical as that may sound to the small cable community, he does have a point. And the shrinking number of lenders willing to step up to fund new technologies and equipment to help them grow their businesses is clear evidence of the hard decisions facing smaller operators.

"When we look at smaller cable operators, those from about 7,000 to 100,000 subscribers, our mandate is they need to be in the process of upgrading from 450 MHz plant to two-way service and should be offering modem service. For smaller operators to compete, they really need a technology path that maintains their relevancy, like two-way, high-speed Internet and voice," said Robert West, senior vice president of CoBank communications division. Tighter criteria CoBank is one of a handful of lenders remaining in the small operator’s universe, yet it, too, is tightening the criteria for securing capital to acquire new technologies.

"We want them to upgrade to at least 750 MHz to generate incremental revenue and put in fiber rings. As technology improves, they can do a lot to improve their systems," West said.

Reducing the number of headends, advancing their technologies, and keeping good accounting records helps. Added West: "We look at how they differentiate themselves from satellite, penetration levels and their community relations. We want to finance those properties. But many have low-tech systems, and to build and maintain a headend is $2 million and up." Other means For most smaller operators, that’s an unreachable number. Consequently, other less expensive means of growing a system, and integrating the necessary technologies, are emerging, albeit with a heavy dose of creative and savvy foresight needed.

"We’ve taken a centralized approach and consolidated 30 DACs (digital addressable controllers) into two, and tied them to billing through IP technology. When you think strategically, it’s possible," said Pragash Pillai, vice president of strategic engineering for Bresnan Communications.

Bresnan, though not considered a typical small cable system, nevertheless faces many of the same technology and business issues as their small cable brethren.

"Being smarter strategically is what it takes. We couldn’t manage 30 DACs. It’s not just capital; it’s the ongoing expense and will get harder with switched broadcast, simulcast, VOD (video on demand) and HD (high definition). If you centralize and tie headends together, you can justify the cost. But you’ve got to follow the technology curve. Planning and strategic engineering are very critical, especially with the speed of new technology adoption," Pillai said. A little magic Yet for the majority of smaller systems, it’s not about new technology adoption. It’s about financing it. And for traditional small system lenders such as Wells Fargo, it’s a capital market chock-full of stop signs.

"It’s certainly a challenge for smaller operators in today’s credit cycle, and much of the capital access depends on how they’ve kept up with technology. Are they two-way? Are they working to upgrade? There’s also a movement in non-upgraded areas of 550 MHz and below to give up video and focus on high-speed data. We haven’t been approached with that business model yet. What we look at today is as technology cost falls, how does it add to the enterprise value, and does it support the loan. But there are no absolutes," said Tracy Moosbrugger, vice president of Wells Fargo’s media finance.

Well, maybe one absolute. Said Moosbrugger: "If the system is big enough, with access to equity, and the strategy is to make some acquisitions, we’d make an exception and grow with the company. But it’s very true that small markets always are significantly underserved by the banking industry. They just can’t seem to find the right magic point."

There’s little magic to securing capital to upgrade a small system’s technology, maintains West. "Some small operators have done a good job with their books, and that helps. Good financial reporting, good progress on penetration, and upgrading technologies are vital. But the typical smaller systems have been neglected and don’t have the necessary technologies to compete. That doesn’t give us much comfort." Dual carry Just as uncomfortable, noted Gerry Kaufhold, principal analyst for the research group In-Stat, could be the FCC’s dual must-carry approach that requires smaller operators to receive and download local ATSC digital terrestrial signals and re-transmit them on an analog 6 MHz-wide cable channel.

And provide a full digital version on the digital cable tier of service. Said Kaufhold: "Most cable operators have a big issue with this. Smaller operators may only have 450 MHz of ‘final mile’ bandwidth, so they don’t have room to provide dual carriage of local TV signals and still increase the number of HDTV channels, and provide extra 6 MHz-wide channels to support DOCSIS 3.0 data services. If small operators must provide dual must-carry of local TV signals, they may not be able to invest in more HD channels or improved [data] speeds." HD, capacity And that’s not good. Particularly with HD being considered absolutely essential to a small system’s growth and to accessing capital.

"If you don’t embrace HD, you’re looked upon as a loss leader," Pillai said. "It’s a strategic investment, especially for smaller operators. They can’t sit and not do HD."

Nor can they sit on legacy equipment and technologies, maintains Garrett Baker, managing partner for Waller Capital Partners. "Most believe you can compete with at least a 750 MHz plant with voice and Internet services, and there’s not much capital expense needed. The capital is more expensive, if available at all, but the general rule is that it’s worth it to upgrade to 750 MHz."

Others aren’t so sure. "Capacity should be at least 750 MHz or above, and even $50,000 is a lot of money for many smaller operators. It’s a real struggle for systems under 7,000 subscribers. There are still some systems valuable to MSOs that can interconnect them, however. And there are buyers, like utilities. But it’s very difficult for smaller operators," said Pat Thompson, vice president at RBC Daniels. Still possible Despite the rocky road to capital, companies such as Wells Fargo and CoBank insist they’ll listen to offers by smaller operators. Concluded Moosbrugger: "We’re definitely open for business, including the cable market. It has served us well in the past, and we may have missed some opportunities with candidates that fit our profile."

For many smaller operators, they hope so.

Craig Kuhl is a contributor to Communications Technology. Reach him at craigkuhl@comcast.net.

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